New Finra rules could help brokers clear records in certain cases

Regulator working on dual tracks but specifics and timing remain uncertain

By Dan Jamieson

Aug 8, 2013 @ 4:57 pm (Updated 5:21 pm) EST

finra, broker, expungement

Changes are in the works for registered representatives who want to wipe arbitration claims from their disciplinary records, and while timing and specifics remain vague, one plan could benefit brokers.

The Financial Industry Regulatory Authority Inc. is working on two separate initiatives to revamp its expungement process.

At a meeting of lawyers earlier this month, Linda Fienberg, president of Finra's arbitration unit, said that the regulator is considering changes in the existing standards that arbitrators use for granting expungement. Separately, Finra plans to propose a procedure that would make it easier for brokers to expunge black marks arising from arbitration claims in which they were not named as a party.

The developments are part of long-running saga to tweak Finra's complicated — and controversial — expungement rules.

How Finra might revise its existing standards isn't yet clear, and the exact timing is uncertain, but Finra is expected to propose changes within the next 18 months. Finra spokeswoman Michelle Ong declined to comment on specifics of the review.

Ms. Fienberg said Finra is “looking at the issues raised by investors concerning settlement negotiations when an expungement request is involved,” according to a Reuters report.

Attorneys for investors have long complained about the apparent ease with which expungement requests are granted by arbitration panels — especially in cases where a brokerage firm has settled with a customer before a full hearing. Customers usually don't dispute such a request by the broker or firm, and the money offered in a settlement gives the appearance of buying a clean record.

To some observers, Ms. Fienberg's comments sounded like Finra is considering tightening up its standards. Brokers must now prove to an arbitration panel that a customer's complaint was false, factually impossible or clearly erroneous, or that the representative was not involved in the matter.

“There's a certain amount of vagueness” in current standards, said Seth Lipner, a plaintiff's attorney at Deutsch & Lipner.

Separately, Finra continues to work on a set of new procedures, first proposed in May 2012, that would allow brokers to expunge information from their records in cases in which they were not named in an arbitration complaint.

These so-called “in re” procedures are expected to help brokers by making expungement easier and cheaper. The process would let registered reps ask for expungement without involving their firms or customers in the case.

In December, Finra's board gave the go-ahead to submit the in-re proposal to the SEC. Industry observers had expected to see the plan some time this spring, but now say that Finra is still working on it. Finra's Ms. Ong could not provide more information on the timing.

Finra's review seems to have been sparked by a critical New York Times article in May about “people buying expungements,” said David Robbins, a partner at Kaufmann Gildin Robbins & Oppenheim LLP, who represents both brokers and investors.

Mr. Lipner was featured prominently in that New York Times piece, arguing that too many arbitrators are rubber-stamping expungement requests.

He recently reviewed settled cases that included expungement hearings over the first six months of 2013; of the 205 cases he found, expungement was granted in 192 of them — a win rate of 93.6%.

“That's a pretty sure thing,” Mr. Lipner said.

That success rate “is clearly part of what everyone is taking a look at” in reviewing standards, said Melanie Lubin, Maryland securities commissioner and head of a state regulators' group that advises on disclosure issues.

“We view expungement as an extraordinary remedy,” she said. “The presumption is that information should remain on [a broker's] record” absent strong evidence to the contrary.

Industry attorneys, of course, don't think arbitrators are being too lenient.

“It's a high [legal] bar and takes a lot of effort to go through the [expungement] process,” said defense attorney Bryan Ward, a partner at Sutherland Asbill & Brennan LLP.

In fact, few brokers make the effort, which could be why those who do seek expungements have achieved a high success rate, Mr. Ward said.

Mr. Lipner figures that brokers seek expungement in 10% to 20% of settled cases.

“That's still a significant number,” he said.

Concerns also have been raised about a growing number of expungement requests by brokers.

Last year, state regulators received 519 requests, up from 372 in 2011 and 182 in 2010.

Under expungement procedures, both Finra and state regulators must be notified when a broker seeks to finalize an expungement award in court.

But the increase seems to be tracking the higher number of arbitration cases overall that were filed since the financial crisis, Ms. Lubin said, adding that state regulators are still analyzing expungement cases for underlying problems.

Whether the latest tweaks to expungement rules will fix what has long been a controversial process is anyone's guess.

“This is the fourth time in 15 years that they've tinkered with expungement. It shows how tough it is to get it right,” Mr. Lipner said.

In 1999, Finra, then known as the NASD, began requiring brokers to get expungement awards confirmed by a court after state regulators raised concerns about deletion of public records.

In 2004, Finra implemented the current standards that brokers must show in obtaining an expungement.

Controversies with expungements continued, though, and in January 2009, Finra implemented new procedures for arbitrators to follow in considering expungements, including a requirement to hold a hearing, review settlement agreements and provide a written explanation.

  @IN Wire

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